Bubbles and crashes

Dilip Abreu and Markus Brunnermeier

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We present a model in which an asset bubble can persist despite the presence of rational arbitrageurs. The resilience of the bubble stems from the inability of arbitrageurs to temporarily coordinate their selling strategies. This synchronization problem together with the individual incentive to time the market results in the persistence of bubbles over a substantial period of time. Since the derived trading equilibrium is unique, our model rationalizes the existence of bubbles in a strong sense. The model also provides a natural setting in which public events, by enabling synchronization, can have a disproportionate impact relative to their intrinsic informational content.

Keywords: bubbles; crashes; temporal coordination; synchronization; market timing; overreaction; limits to arbitrage; behavioural finance (search for similar items in EconPapers)
JEL-codes: E30 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2002-02
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Citations: View citations in EconPapers (11)

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http://eprints.lse.ac.uk/24905/ Open access version. (application/pdf)

Related works:
Journal Article: Bubbles and Crashes (2003)
Working Paper: Bubbles and Crashes (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24905

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